Changes in credit card rates may reflect wider turmoil
October 15, 2014
- Average consumer credit card rate, overall market: 17.17 percent
- Average consumer non-rewards credit card rate: 15.56 percent
- Average consumer rewards credit card rate: 17.87 percent
- Average student credit card rate: 17.56 percent
- Average business non-rewards credit card rate: 14.49 percent
- Average business rewards credit card rate: 15.53 percent
The U.S. bank prime rate remained at 3.25 percent throughout the first half of October.
The latest survey saw rates rise in the consumer non-rewards and business rewards categories, and drop in the business non-rewards category -- though the latter was only because a card offer with higher-than-average rates was taken off the market. This changeability was consistent with an atmosphere of unrest that has come over the financial markets lately. That atmosphere could further impact credit card rates in the months ahead.
The stock market suffered some steep daily losses as investors began to express concern about slowing economic growth. On the surface, this might seem incongruous on the heels of yet another strong employment report, with 248,000 new jobs having been added in September. However, as encouraging as that is, the concerns were rooted in the global rather than the domestic economy.
Given the interdependence of modern economies, even with its job market growing the U.S. cannot be immune to these problems. The question now seems to be whether American economic strength can help pull the world through a difficult time, or if the world's difficulties will bog down the American recovery.
The impact of a possible slowdown on credit card rates could depend very much on the customer's credit rating. Generally speaking, a slow economy tends to encourage lower interest rates. This is a function of lower inflation, low demand for credit, and monetary policy responses. At the same time, a slow economy also raises credit concerns, as higher credit risks often are the first to turn sour when the economy weakens.
For this reason, credit spreads tend to widen when the economy weakens. For instance the yield difference between junk bonds and AAA bonds becomes greater. Similarly, the difference between credit card rates for customers with shaky credit histories and those with excellent records may grow, as credit card companies demand higher rates to protect themselves from worsening repayment patterns.
Interestingly, the spread in credit card rates did widen in the latest survey. This may not be significant because the change was very small, but if the economy takes a turn for the worse, this could be just the beginning of a trend. That makes this an important time for customers to keep their credit ratings in the best shape possible.
Consumer credit card rates
The average rate on consumer non-rewards credit cards rose by 8 basis points to 15.56 percent, while the rate on rewards credit cards held steady at 17.87 percent. This reduced the difference between non-rewards and rewards credit card rates, making rewards programs relatively less expensive.
Student credit cards
The average rate on student credit cards has been remarkably stable, having experienced no change since February.
Business credit cards
The average rate on business rewards credit cards rose while the average for non-rewards cards fell. This makes rewards programs relatively more expensive. However, it should be noted than business non-rewards cards are becoming increasingly scarce.
Excellent credit vs. average credit
As noted above, a weakening economy often means a widening of the difference between credit card rates for excellent customers and rates for those with shakier credit histories. In essence, this means that weaker credit becomes relatively more expensive in a slowdown or recession. Rate changes in the first half of October showed a minor example of this type of widening, as the spread between the overall average rate and the average for the best customers widened by two basis points, to 4.00 percent.
In total, IndexCreditCards.com surveys information from nearly 50 different credit cards, and includes multiple credit-rating tiers from many of those cards. Examples of offers surveyed include American Express, Capital One, Chase, Citi, Discover, and other MasterCard and Visa branded cards. The information compiled not only demonstrates trends in credit card rates over time, but also indicates the different values credit card companies put on different target markets (consumer, business, etc.), as evidenced by the differences between rates for those markets.